Around the Curve

AMLO's Mexico: Hopes and Concerns

On December 1, 2018, Andrés Manuel López Obrador (AMLO) will become President of Mexico. He begins his term on shaky ground with investors following a poorly executed referendum and subsequent cancelation of a Mexico City airport project in late October.

Since the referendum, Mexican assets have been quite volatile—equities and the peso have sold off and 10-year government bond yields have risen. Is this reaction justified or have investors overreacted to AMLO’s tactics?

Here are three things that we don’t want to see from AMLO’s administration:

Interference with the central bank. The Banco de México (Banxico) is a strong, credible, and autonomous central bank. Any attempt to exert undue influence or interfere with monetary policy would be very concerning.

Any moves to undermine the new U.S.-Mexico-Canada Agreement (USMCA). AMLO, initially a foe of NAFTA, has made positive comments about the new trade deal. He’s expected to sign the deal, along with U.S. and Canadian leaders at the G20 summit. However, legislators from the three countries still need to approve the agreement before it goes into effect.

A reversal of the previous administration’s historic energy reforms. It’s clear that AMLO will take a more nationalistic approach to energy than his predecessor; however, his new Secretary of Energy has spoken about a pragmatic energy agenda, mixing old and new ideas together. Although we are disappointed with some of AMLO’s proposed energy policies, a reversal of the 2013 energy reform would be an unambiguous negative.

AMLO has been keenly aware of the frosty reception he has received from investors, who are worried about how his policies will affect the Mexican economy and asset prices. Therefore, he has quietly been paying attention to market sentiment as it relates to the peso and MBonos.

We think it is a constructive sign that AMLO is factoring in market sentiment, though we will be closely looking for any of the warning signs above. AMLO and his Morena party will be looking to build momentum over the next three years; if they manage to build a two-thirds legislative majority after the 2021 midterm elections, it will remain to be seen whether they will amend the constitution and rollback the important reforms enacted by his predecessors.

In our opinion, this fourth and biggest wildcard risk is something to watch closely in the longer term.

Definitions:

MBonos refers to Mexico’s government bonds.

The North American Free Trade Agreement (NAFTA) – Spanish: Tratado de Libre Comercio de América del Norte, TLCAN; French: Accord de libre-échange nord-américain, ALÉNA – is an agreement signed by Canada, Mexico, and the United States, creating a trilateral trade bloc in North America. The agreement came into force on January 1, 1994.

The United States–Mexico–Canada Agreement (USMCA; Spanish: Acuerdo Estados Unidos-México-Canadá, AEUMC; French: Accord États-Unis-Mexique-Canada, AÉUMC) is a pending free trade agreement between Canada, Mexico, and the United States, intended to replace the current North American Free Trade Agreement (NAFTA). It is the result of the 2017–2018 renegotiation of NAFTA by its member states, which informally agreed to the terms on September 30, 2018, and formally on October 1. Final ratification and implementation is pending.

The Group of Twenty (also known as the G-20 or G20) is an international forum for the governments and central bank governors from 20 major economies. The members include 19 individual countries—Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa, South Korea, Turkey, the United Kingdom and the United States—along with the European Union (EU). The EU is represented by the European Commission and by the European Central Bank.

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